Why the iPhone 4.0 Update Is a Very Big Deal (Hint: Apple v. Google)

OPINION: Steve Jobs saved the most important part of his iPhone 4.0 announcement today till last — the new in-app advertising system, called iAds.

The iAds system is important because it allows the App Store to create a completely self-sustaining app economy that is sealed off from the wider Web.

Tech guru Tim O’Reilly says the App Store is already becoming a rival to the web itself. The App Store, he says, is “the first real rival to the Web as today’s dominant consumer application platform.” Consumers will have no need to visit the web on their iPhones and iPads if they get everything they need from apps, which is bad news for companies like Google.

“This is a new phenomenon,” Jobs said about apps at today’s presentation. This is the first time this kind of thing has ever existed. We never had that on the desktop, so search was the only way to find a lot of things.”

The App Store economy is already pretty well developed. There is the app purchase mechanism itself through iTunes, and in-app purchases, which allow consumers to buy stuff from inside apps themselves. But there was a big hole: advertising. Ads are already a big part of the app economy, but clicking on them typically takes consumers out of the app and into the browser, an experience Steve Jobs describes as jolting.

But now Apple has built a sophisticated ad-serving mechaninsm right into the iPhone (and iPad, natch), which will make the App ecosystem like AOL in the early days — a walled garden. And one that has it’s own economy: in-app purchases, and now in-app advertising. There will be no need to go to the wider web anymore — and that cuts out Google.

“What’s happening is that people are spending a lot of time in apps,” Jobs said today. “They’re using apps to get to data on the internet, rather than a generalized search.”

No wonder Apple and Google are at war. Google swooped in a bought AdMob just to keep it out of Apple’s hands (so Apple snapped up Quattro instead). Of course, Google isn’t on the ropes yet. Android is Google’s attempt to keep it relevant in mobile, and so far it’s holding its own against the iPhone.

But if early numbers are any indication, the iPad is going to be an iPhone-sized hit. Combine the iPad, iPhone and iPod touch, and that’s a lot of mobile devices in Apple’s walled garden.